The online gaming market is growing at a fast pace, and it got impetus especially after the coronavirus-induced lockdown. According to estimates, the industry is expected to grow to $8.5 billion by 2027. The finance ministry is considering classifying online games into those based on skill and chance-based ones with a view to create a differential taxation framework for both categories.
Online Gaming Vs Gambling
With the central government providing the base distinction, state governments have already begun moving the needle when it comes to distinguishing between online gaming and gambling. The Chhattisgarh Gambling Prohibition Act of 2022, which was notified in March of this year, prohibits online gambling and betting, specifically excluding skill-based games. This serves as a reflection of the changing perception of online gaming among the various levels of the Government.
Tax Rules On Online Gaming
The next GST Council meeting is expected to be held in June 2023 and the online gaming industry is hoping for the last part of the puzzle to fall in place for it. Goods and services tax (GST) on the online gaming industry has been the subject of debate and deliberation for some time.
While the industry has been urging for taxation of only gross gaming revenue (GGR), the government has also been deliberating levying GST on the entire prize pool which is the norm for activities that are in the nature of betting, wagering and gambling. This is driven by a perception that gaming is akin to betting and gambling and, therefore, should be subject to similar taxation.
With MeitY’s appointment as the nodal ministry for online gaming and the subsequent rules published by them, the industry has been definitively distinguished from betting and gambling. Ideally, to ensure consistency in the law, these changes should be accounted for in the way GST will be levied on the industry. Notably, the direct taxation framework for online gaming in India has also undergone significant changes in this year’s budget.
Now, the Income Tax Act has decoupled online gaming from lottery and gambling/betting, and all net winnings are now taxed at 30 per cent. This also addresses a core concern of tax authorities around tax evasion by eliminating any potential tax revenue leakages from the prize pool.
This, coupled with the GST that gaming platforms already pay, ensures that every rupee flowing through the online gaming ecosystem is subject to tax. The industry largely feels that taxing the prize pool again by the means of GST will result in repeated taxation and will create an unfair tax burden on the platforms and the user.
Meyyappan Nagappan, partner at Trilegal, said, “MeitY’s appointment has given the much-needed legitimacy for the online gaming industry, which is expected to grow up to $8.5 billion by 2027. It has the ability to drive GDP growth and help India meet its target of being a Trillion-dollar digital economy by 2026. Any adverse changes to the GST structure can undo all the positive developments so far, send the wrong policy signal and potentially kill the industry.”
According to recent media reports, the finance ministry is considering classifying online games into those based on skill and chance-based ones with a view to create a differential taxation framework for both categories. In light of all these changes, a progressive taxation framework should be adopted for the regulated online gaming industry where GGR is the basis for levying GST.
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